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Managerial Accounting for the Hospitality Industry

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Lesson Transcript
Instructor: Elizabeth Wamicha

Elizabeth teaches undergraduate courses in Business and Information Technology for the last 7 years. She is currently on course to completing a Doctorate in Information Systems

This lesson examines managerial accounting in the hospitality industry. Managerial accounting is a critical activity as it encourages measurement and analysis of information with the aim of meeting organizational goals.

Managerial Accounting

Imagine you are the accounts manager of a large company in the hospitality sector and you would like to understand the costs that your company incurs in order to deliver high quality service to its customers. You would need a comprehensive set of reports that shows costing information of all the company's operations. The process of developing these comprehensive reports is called managerial accounting, also known as management accounting. These two terms will be used interchangeably throughout the lesson, but remember they mean the same thing.

Managers working within the hospitality industry need to be able to access comprehensive reports that detail the cost of resources that their businesses are spending in order to make specific decisions that could improve profitability of the business. Managerial accounting reports also help managers establish if there are any deviations between planned budgets and actual expenditure.

The following section further analyzes the various roles of managerial accounting in the hospitality industry. In this lesson, we'll examine a hypothetical airline company known as Best Airways and its accounts and finance manager, Andrew. The lesson will illustrate how Andrew uses managerial accounting and the effectiveness of managerial accounting in evaluating costing decisions for Best Airways.

Role in the Hospitality Industry

Through margin analysis, Andrew is able to determine the amount of profit that has been generated from selling air tickets. He is able to determine how much has been made from a particular customer, a particular market and even a particular region. For example, in the case of Best Airways, margin analysis would involve assessing the level of profit accrued by increasing the price of an air ticket over a specific period of time.

Through capital budgeting, Andrew is able to use information on capital expenditure in order to decide whether to purchase certain assets. Capital expenditure describes funds that have been used by a company to purchase or upgrade physical assets. These physical assets could be airplanes, office buildings and other property. When developing capital budgets, Andrew uses metrics such as net present value and internal rate of return in order to provide decision makers with insights on whether to purchase or upgrade certain assets or not. By having a comprehensive capital budgeting report, Andrew is also able to determine payback period. Payback period is the amount of time that Best Airways will need to recoup on asset purchases or upgrades.

Through constraint analysis, Andrew can evaluate the inefficiencies in the company's business processes. Overall, the goal of constraint analysis is to determine if there are any bottlenecks in a given process. An example of a bottleneck is when an air ticket purchase process is too long such that a customer gives up on the purchase altogether. The rates at which these bottlenecks occur are calculated and their impact on revenue, profit and cash flow is also determined.

Product valuation involves determining the real cost of certain products and services. Andrew can calculate this real cost by allocating operating cost incurred in order to deliver a certain product or service. This is done in order to assess the exact cost related to providing a particular product or service. Factors that can be used to determine actual cost are the quantity of goods produced or even the size and capacity of an aircraft.

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